This article is written by Ayushi Mahajan, pursuing BBA-LL.BÂ from Centre For Legal Studies, Gitarattan International Business School (Guru Gobind Singh Indraprastha University). This article talks about the legal aspects of auditing in India and its related concepts.
Table of Contents
Introduction
Auditing or auditing is considered as a system of reviewing the records and activities of various books of a company. Basically, auditing is the checking and inspection of accounts of various books, followed by the physical checking of goods and inventories to ensure that all departments of the company are following a documented system of recording transactions. Auditing is done to ascertain the complete accuracy of the financial statements provided by the company.
An auditor is called an independent professional who is qualified to audit a company. In accounting, an auditor is someone who is responsible for the evaluation of the validity and reliability of financial statements of a company or organization. The term auditor is sometimes synonymous with ‘comptroller’.
Concept and meaning of audit process
The audit process can be defined as a set of processes and tasks to control an organization. Their aim is to test and prove that the processes are being operated effectively and a controlled control mechanism is followed. They also aim to explore opportunities for improvement in the audit process. The different types of audit processes are:
Preventive audit process
It is a way of estimating problems, it is possible to present a series of guidelines for this process and the best way is, for example, the responsibilities and responsibilities inherent to it.
Detective audit process
It is used to find out if there are discrepancies in the process, but without indicating ways to fix them.
Corrective audit process
In this case, once the audit process detects a problem, it should investigate its reasons for suggesting ways to fix it.
Objectives of auditing
The basic objective of auditing is to express opinions on financial statements, profit and loss statements and balance sheets of companies. The objectives of an audit can be sub-classified into two parts:
- Primary objectives.
- Subsidiary objectives.
Primary objectives of auditing
The main objectives of the audit are known as the primary objectives of the audit. They are:
- Examining the internal probe system.
- Checking the arithmetic accuracy of books of accounts, verifying them, casting them and balancing them.
- To verify the authenticity and validity of the transaction.
- To confirm the existence and value of liabilities and assets.
- To examine the proper difference between the nature of transactions and capital and revenue.
Subsidiary objectives of auditing
These are objectives that have been established to help achieve the primary objectives. They are:
- Â Over and under-valuation of stock.
- Â Identification and prevention of errors.
- Â Detection and prevention of fraud.
Types of audit
Statutory audit
Statutory audits are audits conducted by the Government of India to check the financial position of a company/organization. For this auditing, qualified auditors who are acting as independent or external parties perform the statutory audit. The statutory audit report has been prepared according to the forms and instructions laid down by the Government of India.
Types of statutory audits
Tax audits
Tax Audit is compulsory for every business with an annual turnover of more than 1 crore and every professional earning more than 50 lakh rupees per year as required under Section 44AM of the Income Tax Act of India, 1989. After the end of the last financial year, the tax audit report is to be filed in the scheduled audit until September 30. If the required person or business fails to file that report, they face a fine equal to 0.5 percent turnover.
Company audits
The details and provisions of the company audit are detailed in the Companies Act, 2013. It says that every company, irrespective of its annual turnover or type of business, has to have its financial accounts audited by a qualified professional (auditor).
As per company laws, you can appoint an auditor for a period of 6 annual general meetings. If you are a partnership / sole proprietorship, you cannot have the same auditor for more than two terms.
Internal audit
A company or business may conduct an internal audit to check and verify the financial health of a company. Internal audit is performed by the company’s internal employees or an independent contractor.
Types of internal audit
Compliance audit
There are several types of compliance that a company or any other type of business has to follow to stay in business. A compliance audit is done to determine whether the company/partnership / sole proprietorship is following the rules and regulations established by the government.
Investigative auditing
An investigative audit takes place when there is some suspicious activity in the finances of a business entity. In other words, if there is something wrong with the financial statements of the business it is done. Another reason for conducting exploratory audits is to assess the risk factors of the business.
Operational audit
Operational audit is done to evaluate the efficiency of a particular aspect, function or department of a business. This does not always require financial data, but information about whether departments/functions/aspects are performing their tasks properly.
Financial audit
A financial audit is done to check the fairness, accuracy and reliability of financial data. There are many companies that misrepresent their financial information to get better PR. Financial auditing ensures that this type of fraud strategy does not occur. Because accuracy and fairness are required, independent contractors work to conduct unbiased financial auditing.
Management audit
The management audit is conducted by independent contractors who provide insight into the management structure of the business. Similar to an operational audit, management audit is done to check the performance of the business as a whole.
Role of auditors
An auditor is called a professional who evaluates and accumulates evidence to report on the degree of a company’s claim that they comply with an established set of norms or standards procedures.
A skilled auditor must possess certain qualities in addition to his professional qualifications. He needs to conduct auditing effectively and efficiently.
Section 139 to 148 of The Companies Act 2013 deals with the provisions of Auditors, Auditing and Accounting.
Eligibility and qualification of auditors
A person is called an auditor of a company if he is a chartered accountant. When a firm is appointed as the auditor of a company, only persons who are chartered accountants act and sign on behalf of the firm.
Disqualification of auditors
A person is disqualified from the position of an auditor if he is:
- Any officer or employee of the company.
- A person whose relative is a director of the company or is in the employment of a director or principal managerial personnel of the company.
- A person who has been convicted by the court for the offence of fraud and the term of 10 years has not expired from the date of such sentence.
Removal of auditors
- The company must obtain prior approval from the National Company Law Tribunal (NCLT). A form of ADT-2 is to be filed within 30 days after the board resolution is passed. After the approval of the central government, the company will pass a special resolution at the general meeting within 60 days.
- If the auditor resigns himself, a form ADT-3 has to be filled and submitted to the Registrar of Companies (ROC).
Powers of auditors
There are certain powers of the Auditors as follows:
- Right to Access – The Auditor’s right to access includes:
- Transaction by book entries.
- Loan and Advance made shown as deposits.
- Proper security for loan and advances.
- Sale of Assets in Securities in a loan.
- Personal expenses change to a revenue account.
- Auditor to sign audit reports.
- Right to remuneration.
- The auditor shall be in General Meeting.
- Consent of Auditor (while making prospectus etc.)
Duties of an auditor
There are following duties of an auditor:
- Auditor’s duty to make reports which state:
- He has sought and obtained all information and explanation.
- Whether proper books of account have been kept.
- Whether a company’s balance sheet and profit and loss account are in agreement with books of account.
- Form a negative opinion where necessary: There is a high degree of assurance and reliability in the auditor’s report as it includes the auditor’s opinion on the financial statements. Where the auditor feels that the statements do not reflect a true and fair view of the financial condition of the business, he is also entitled to form an adverse opinion on the same.
- Auditing standards: Auditing standards are issued by the Central Government in consultation with the National Financial Reporting Authority. These standards assist the auditor to perform his audit duties with relevant ease and accuracy. It is the duty of the auditor to follow the standards while performing his duties as this increases his efficiency comparatively.
- Fraud reporting: Generally, while performing their duties, the auditor may have some doubts regarding fraud occurring within the company, certain situations where the financial statements and figures contained therein are not included. When he finds himself in such situations, he must immediately report the matter to the central government and in the manner prescribed by the act.
Audit and auditing standards in India
To ensure that the information in the financial statements is of high quality and acceptable worldwide, the Auditing and Assurance Standards Board under the Council of Institute of Chartered Accountants (ICAI) has formulated certain standards. These conform to international standards issued by the International Auditing and Assurance Board (IAASB). Standards issued by IAASB include:
- Standard of Quality Control (SQCs) – For all services under engagement standards. These standards apply to all auditing firms that conduct audits and review historical financial information and assurance and related service attachments.
- Standards on Auditing (SAs) -For an audit of historical financial information. These apply whenever an independent audit is conducted.
- Standards on Review Engagements (SREs) – To review historical financial information.
- Standards on Assurance Engagements (SAE) – For assurances other than audit and review of financial information.
- Standards on Related Services (SRSs) – For all attachments regarding the application of agreed procedures for information, compilation attachments and other related services.
Regulations governing audit process in India
Comptroller and Auditor General of India (CAG)
The Comptroller and Auditor General of India (CAG) is an authority, established by the Constitution under the Constitution of India / Part V Chapter V / Sub-Part 7B / Article 148, which provides for all receipts and expenditure of the Government of India. is. state. Maintains accounts The government financed the government and body officials to a large extent.
The CAG is also an external auditor of state-owned corporations and conducts supplementary audits of government companies, i.e. any non-banking / non-insurance company comprising at least 51 percent of the existing or subsidiaries of the central government. Government companies should have an equity stake.
The CAG report is taken into consideration by the Committees of Public Accounts Committees (PACs) and Public Undertakings (COPUs), which are specialized in India’s Parliament and State Legislatures.
The CAG is also the head of the Indian Audit and Accounts Department, whose affairs are managed by officers of the Indian Audit and Accounts Service, and has more than 58,000 employees across the countryÂ
Institute of Chartered Accountants of India (ICAI)
The Institute of Chartered Accountants of India was established in 1949 under the Chartered Accountants Act in India, which was passed by the Parliament of India for the purpose of regulating the profession of accountancy. ICAI is the second largest professional accounting body in the world, second only to AICPA. It determines eligibility for a chartered accountant, provides necessary examinations and grants licenses in the form of a certificate of practice.
Basic Principles governing an audit process
- Independence, integrity and objectivity
- Skill and competence
- Documentation
- Audit evidence
- Audit conclusions and reporting
- Accounting systems and internal controls
- Planning
- Work performed by others
- Confidentiality
Impact of Covid-19 on audit of financial statements
Covid-19 (Coronavirus) is having a worldwide impact which in turn has affected individuals, families, businesses, governments in such a deeply negative way that its effect is not yet known to all. Covid-19 has an impact on every part of society, which may include social, economic or geographic and every affected area and it will take time and cost to return to normal. As we speak, the virus is spreading and we are at such a turn, that we ourselves do not know how deep we will go. The Covid-19 outbreak has implications for areas such as accounting and auditing. Areas of constraint are:
Cash management
The quarantine situation of Covid-19 poses the biggest challenge of the cash management cycle for each business, resulting in loan instalments that cannot be repaid, concern over the submission of data required by lenders, inventions of working capital requirements (stock) Accounting, and payment of salaries which in turn affects the production cycle.
Statutory dues
Cash flow issues will also affect the submission of statutory dues such as provident funds, employee provident funds, and goods and services tax. This may result in adverse opinions by auditors in their audit report.
Presentation of financial statements
COVID 19 is a period of significant economic, political and technological change. Expectations from all organizations are increasing rapidly. This is as true for the professional services sector as for the companies we work with. The audit profession is under much scrutiny and has been the subject of much commentary and challenge in the public domain, including being in the news headlines, not always for positive reasons. All stakeholders involved in the audit process must contribute to ensure that the auditor’s rules and standards are understood by the general public as there is still a gap to be audited and what an audit can achieve. Audit firms are working on enhancing audit quality and increasing use of technology, with core training.
The technology will enable auditors to audit 100% of the company’s available information and provide more benchmarking and market analysis. However, technology will be unable to change the critical decision element of an audit, leaving one key element to the professional skills and competence of more senior members of audit firms. This means that the traditional model has come to an end and auditors will have to build their capabilities to a more varied, exciting and rewarding career.
Conclusion
No doubt, auditing is a tool to give a true and fair picture of a company’s finances, but either way, it has always fallen short. With the extension of deadlines provided by regulators related to financial results, submission of Corporate Governance Reports, GST Returns etc. will help resolve issues to some extent, though some relief in terms of extension of time by financial institutions Banks will be provided. NBFCs should be provided for non-performing non-asset valuations, which will provide some relief to companies and lenders in times of liquidity crisis.
References
- https://www.advocatekhoj.com/library/bareacts/companies2013/index.php?Title=Companies%20Act,%202013Â
- https://www.advocatekhoj.com/library/bareacts/companies2013/index.php?Title=Companies%20Act,%202013Â
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